Think tank calls for end of tax breaks for rich pensioners

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UK - Tax breaks for rich pensioners should be ended, according to a report from CentreForum, the independent liberal think tank.

'Tax justice whatever your age' urges the UK coalition parties to remove imbalances between young and old by moving to a more "age-neutral" tax system.

It says the richest pensioners pay far less tax than people of working age on the same income.

Yet it is the young who have greater financial pressures in terms of repaying student loans, mortgage costs if they buy their own home, and childcare costs for those who have children.

The report proposes that the tax-free lump sum payable on retirement should be phased out, by reducing the limit from £375,000 (€466,000) to £41,450, the income level at which higher rate tax is incurred.

The tax break should also be withdrawn from those with pension savings of more than £250,000.

In addition, existing workers should be unable to accrue further rights to a tax-free lump sum, so the tax break would disappear completely over time.

The report also calls for the National Insurance (NI) exemption to be ended for affluent pensioners.

It suggests an additional NI allowance of £8,000 for pensioners, ensuring that those on low and medium incomes would continue to pay no NI.

However, richer pensioners would not receive this additional allowance, so they would pay the same tax and NI as workers of non-pensionable age.

CentreForum says the changes would create savings of £5bn a year in the short run, rising to £9bn a year over the longer term.

The savings could then be used to raise the personal income tax allowance by £1,700 in the longer term, equivalent to a £330 per year tax cut.

More than 2m people would be taken out of the tax net eventually.

Two-thirds of current pensioner households would be unaffected or even better off under the proposed changes, it said.

The report was written by Tim Leunig, an economist formerly at the London School of Economics, and Adam Corlett, a CentreForum researcher.

The report said: "These proposals are strongly progressive. The only groups who are worse off are the top three deciles of the income distribution. The squeezed middle - rich enough to pay tax but not rich in any other sense - are the main beneficiaries."

Carolyn Saunders, partner at Pinsent Masons, said: "It is important to strike a balance between a fair tax system and encouraging individuals to save for retirement.

"The 25% tax-free lump sum encourages many, who might otherwise save elsewhere, to save in a pension scheme - from which 75% of the fund must still be applied towards producing an income in retirement."

She added: "If tax-free lump sums are capped, those for whom a large sum is important may simply choose to save in other vehicles, such as a succession of ISAs, rather than investing in something that will produce an income in retirement.

"Others who continue to invest in pensions, albeit with a restricted lump sum, will need to use a large part of their pension fund to purchase annuities - which are notoriously poor value.

"Either way, this report is likely to further undermine public confidence in the private pensions system, which cannot be in the interests of any taxpayers - young or old."